Real Estate

HOAs may lose control over short-term rentals

BY BEN GOTTLIEB

Guest Writer

Most homeowner associations are governed by what is called the covenants, conditions, and restrictions (CC&Rs), which govern the rights and obligations of the properties encumbered by it.

Most CC&Rs have general-amendment provisions that allow for amendment of the declaration if a su cient number of votes from the community are garnered – usually a majority, twothirds, or three-fourths vote is required. For the past several years, this procedure has been used by HOAs to pass amendments that prohibit shortterm rentals. In doing so, HOAs have been able to – without much di cultly or legal challenge – exploit the law in Arizona that prevents towns and cities from passing local laws to prohibit short-term rentals.

All of that could potentially change going forward.

In March 2022, the Arizona Supreme Court issued an opinion, Kalway v. Calabria Ranch HOA, LLC, which decided the validity of a legal amendment to the CC&Rs that encumbered properties within an HOA in Pinal County.

The Kalway Court ultimately found several provisions of the amended CC&Rs invalid as a matter of law. Although not a short-term rental case, Kalway is likely to be used as legal precedent supporting future challenges to the validity of amendments by those who oppose short-term rentals.

The Kalway Court held that an HOA cannot create new a rmative obligations where the original declaration did not provide notice to the homeowners that they might be subject to such obligations. Kalway reinforced that a court should construe the notice requirement narrowly.

The key takeaway: the opinion lends support to more successful challenges in the future by homeowners who opposed a passed amendment because there was not specifi c enough notice in the original declaration. And that includes a challenge to a passed amendment prohibiting short-term rentals.

But how does one determine if the original declaration provided adequate notice of a future amendment? Kalway provides guidance.

While the original declaration need not anticipate or state the precise future amendment, Kalway states that an objective inquiry must be applied to determine whether a restriction gave notice of the amendments at issue.

In other words, the original declaration must give notice that a covenant can be amended to refi ne it, correct an error, fi ll in a gap, or change it in a particular way. Future amendments cannot be entire new and di erent.

This new legal precedent might leave real estate investors scratching their heads. Should investors move forward with purchasing rental real estate with the intent to operate it as a short-term rental?

Or should investors back out for fear of a future amendment that would render their short-term rental inoperable, denting the extra rental income that justifi ed paying a premium for the home?

Before purchasing a rental property in an HOA, a careful reading of the CC&Rs is a must. If the original declaration regulates rentals in the community, including the permitted timeframes of rentals, then it is probable a court will uphold an amendment prohibiting short-term rentals.

An objective inquiry would likely show that the original declaration provided notice to the homeowners of a future amendment prohibiting shortterm rentals.

To the extent the original declaration does not regulate rentals or has minimal regulations, future homeowners are likely to lodge challenges to the validity of the amendment prohibiting shortterm rentals.

Of course, Kalway is not limited to just short-term rentals.

Ben Gottlieb and Patrick MacQueen are founders and partners of MacQueen & Gottlieb PLC, one of Arizona’s most honored real estate law fi rms. You can contact Ben Gottlieb at ben@ mandglawgroup.com or 602-533-2840 with any questions regarding real estate legal concerns.

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